With 20% Increase, Multifamily Prices Are Raising the Roof

SAN DIEGO-Multifamily assets are still at the top of investors’ lists when it comes to San Diego County commercial real estate product, as evidenced by a new report on apartment pricing trends in the region. According to the report, compiled by Burnham Real Estate, San Diego County’s overall average sales prices rose 20% in 2003, from an overall price per unit of $101,544 at the beginning of the year to $123,152 by year-end.One significant trend that the 17th annual Burnham Real Estate Report highlights is the increased occurrence in sales fetching more than $100,000 per unit. “In 2003, the $100,000 per unit sale became so commonplace that the Burnham charts have been modified to show the number of such sales for reporting markets,” according to a company statement. Burnham researchers sampled 599 sales countywide for the report and found that 347 of those transactions studied – which equates to 58% – fetched more than $100,000 per unit. When the skewing effect of these “mega transactions” (which Burnham defines as transactions involving 100 or more units with prices of $100,000 per unit or more) were excluded from the data, the adjusted average price per unit was recorded as $85,724 at the beginning of 2003. This number jumped to $104,746 by the end of the year. This jump in pricing can be contributed to various factors, including continued investment demand for income-producing properties, the current dearth of rental product, the potential for future rent increases, and the recent upswing in condo conversions, according to George Carlson, a vice president and apartment specialist with Burnham Real Estate. He says that all of these factors are being fueled by the lower returns provided by other investment vehicles, coupled with today’s historically low interest rates. As Carlson explains, “some people are able to rationalize buying apartments – even with the low, low returns – because other investment vehicles are correspondingly low, which is pretty much a function of the low interest rates.”Carlson tells GlobeSt.com that he sees this pricing phenomenon continuing over 2004, even if interest rates do begin to rise. “I can’t see interest rates going up high enough or fast enough to really curtail this continuing appreciation of apartments,” he explains. The Burnham VP does point out that San Diego County’s apartment sector may experience a slight slowdown by the end of the year, but he does not expect anything comparable to what happened when the last market correction occurred in 1989. At that time, the market correction was fueled by a couple of mitigating factors, like the Tax Reform Act of 1986, the recession and the oversupply of apartments in the San Diego area. “Now, if we have a market correction, the other factors don’t hold true,” Carlson tells Globest.com. “It might slow down if the prices keep getting pushed up, but I don’t see it turning around. I think that the rate of increase will slow down, possibly, but I do see it continuing,” he says. As Carlson explains, “it’s all basically supply and demand and we just don’t have enough apartments.”